The Impact of Pilferage on Inventory Shrinkage

A journal entry also needs to credit the inventory account for $50,000. Standard operation procedures for all stores should be established, included steps regarding crime management .

• About 6% on inventory shrinkage cannot be attributed to a known cause.
• Use the inventory shrinkage rate to find out how much value you lost.
• Other signs or indications as theft, apart from unexplained inventory shortages, are declining profits and rumors .
• It is estimated that 95% of all businesses experience employee theft and management is seldom aware of the actual extent of losses or even the existence of such internal theft .
• Security risk management involves a set of principles and practices like any other management discipline.
• Calculating inventory shrinkage is simpler than the physical count.

Often that means teaching them to interact with inventory management software and that software’s recommendations and analyses. If one of the wine bottles is dropped and shatters, that’s loss of merchandise. Likewise, and it doesn’t have to be a perishable item, if any product is damaged beyond the point of reselling, it will increase your shrinkage percentage.

Formula to Calculate Inventory Shrinkage

Cost control is the practice of identifying and reducing business expenses to increase profits, and it starts with the budgeting process. Reconciliation is an accounting process that compares two sets of records to check that figures are correct, and can be used for personal or business reconciliations.

• But the vineyard only has 598 cases of wine to sell to the wholesaler.
• To calculate inventory shrinkage, take a physical count of inventory and subtract the value from the written value in your account books.
• Inventory doesn’t always match what’s written in your ledger.
• Consequently, it suggests that your workforce is not credible enough, and they may have issues such as lack of motivation or workplace grievances as well.
• And that also means you’ll clear up more shelf space for other, more profitable products.

Calculate the value of the inventory as and when it gets damaged. Also, try finding new ways to reduce damaging of inventory.

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Use this as an opportunity to let them know how shrinkage affects them directly and indirectly, including how it decreases promotions, paychecks, employee profit shares, and more. When actual losses are determined, debit the reserve account and credit inventory by the loss amount. Shrinkage has no advantages as it causes loss to the organization. But it teaches a lesson to the organization like implementing strong internal control, employing trustworthy employees,, and not blind faith in in the employees, even high-class employees. In addition, it teaches the lesson that surprise visits should check and reconcile regularly.

• When retailers focus their efforts on theft it’s not uncommon for the criminal to change tactics and create a new method of loss.
• These systems can be tied to digital video recorders to provide clear images of who sold what to whom with a click of a button and can be delivered to any location around the world.
• These tags broadcast an audible alarm throughout the store when a shoplifter attempts to improperly remove it from merchandise.
• The Ernst & Young survey claims that employees who were caught stealing took seven times as much per person as customers who were apprehended did.
• However, due to shrinkage, your actual inventory value is $63,000.
• If this information is full of errors, the IRS can get involved as well and potentially audit your business.
• Once you know the amount of inventory you should have, determine how much inventory you actually have.

However, if the year ends before insurance reimbursements are received, the firm may estimate and deduct its unreimbursed loss. Shrinkage if not stopped then the employee can get lots of personal benefits and it gives encouragement to the employees to theft more and get the personal benefits. Shrinkage is recovered from the customer, which results in an increase in the selling price of the Inv.

Shrinking Inventory Shrinkage

He is the sole author of all the materials on AccountingCoach.com. The term shrinkage may also be used by manufacturers to describe the loss of raw materials during their production processes. This shrinkage is also known as spoilage or waste and it can be either normal or abnormal. Use a double-check system so that a second person has to verify records and account for shipments. Assign one of your employees personal responsibility for inventory accuracy. One of your employees entered a wrong number somewhere in the system. Putting down the wrong price or reversing 19 to 91 will throw off your inventory.

These increased prices are passed on to the consumer, who is required to bear the burden for theft and inefficiencies that might cause a loss of product. https://business-accounting.net/ If a consumer is price-sensitive, shrinkage works to decrease a company’s consumer base, causing them to look elsewhere for similar goods.

Inventory Shrinkage Is Recorded When…

Strong Internal Control is to be implemented to avoid inv. Double-checking physical count with the book records is also an internal control to prevent IS. According to the 2016 National Security Survey, businesses in the United States lost $45.2 billion through inventory shrinkage in 2015. The amount represented a significant increase from the $35.3 billion recorded in 2008 during the National Retail Security Survey . If you delegate inventory management, ask two or more employees to count inventory. By involving multiple employees, you can decrease the chances of one employee recording fraudulent numbers.

Utilisation is simply the number of hours that employees are available to work on their primary task , divided by the total paid hours. So a Shrinkage Figure of 30% equates to a Utilisation figure of 70%. Acquiring or upgrading video security systems will also be a great help—especially in cases when fixing ink or magnetic tags to items isn’t reasonable. Maybe someone is taking cash from a drawer or a bottle of liquor from behind the bar. Vendors can also deliver different products than were originally agreed on. If, for example, a Grand Cru wine was ordered but the vendor filled the order with a Premier Cru of the same vintage.

As such threats, retailers must learn to adapt and manage retail loss prevention measures, as an important aspect of security risk management. Risk management involves a set of principles and practices which allows the retailer to evaluate the value of his assets, possible threats to them, and to determine appropriate measures to secure them . In this case of retail theft, these assets pertain to the retailer’s inventory. Thus in addition to surveillance equipment, the retailers should also develop an anti-shoplifting strategy, policy or program to combine electronic security devices with employee attentiveness. In the case of internal theft, preventive measures are necessary to reduce the threat of inventory shrinkage. The Ernst & Young survey claims that employees who were caught stealing took seven times as much per person as customers who were apprehended did.

These retailers are among the largest users of electronic detection devices and video surveillance systems, and are thus usually the best equipped in protecting their merchandise from shoplifters . Retail owners and managers thus must keep an eye for signs of theft and must do away with the inventory shrinkage journal entry misconceptions listed above. The key is for retail managers to realize that certain conditions or incidents may not be result of mere carelessness or incompetence, but indications of theft in progress. All irregularities and deviations thus must be evaluated with an open and creative mind.

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Inventory shrinkage is any loss of merchandise inventory from theft, damage, or deterioration. There is a specific adjustment to deal with inventory that was lost or stolen. Administrative errors in paperwork, data entry, lost documents, etc., are one of the leading causes of shrinkage.

Retailers must ensure an ongoing effort to prevent and detect dishonest activity. A more extensive description of the elements involved in shoplifting will be covered in the section of Crime Management Procedures of this chapter. Well-paid and/or senior employees are trustworthy/loyal and don’t need to steal. Study of the security technology available to prevent it, and whether the available technology has been sufficient to respond to this threat. Inventory that is misplaced in a warehouse or misdelivered, is considered shrinkage. Shoplifters take advantage of vulnerable and unobserved areas in your store. The spaces between aisles and racks and dressing rooms are a few ideal places where these thefts occur.